Thursday, November 6, 2014

We always have a list of reasons to buy and sell, and why we think a stock has room to move upwards or downwards.

It happened I am wrong on the nitty gritty but right on the bigger reasons, core reasons.

Let's look at the reasons that I got right.

1) I was looking at both SIA engineering and ST engineering and deciding which to get. SIA engineering actually give better yield. I got ST engineering because it has better FCF, and also because I felt it will be less volatile as it is exposed to four sectors, with the defence/ electronics segment being more defensive. Indeed, when aerospace MRO segment turn, both SIA engineering and ST engineering aerospace segment are not spare, but ST engineering has some buffer.

As for the things I got it wrong, they are plenty.

1) I expect aerospace and electronics to deliver the growth for ST engineering, for this quarter, only electronics deliver, and I believe it is due to its large scale system group. Aerospace is actually a drag on results.

2) I initiate a position Sembcorp Industries today at $4.6. I have been watching it since it go below $5. I always thought that the marine will be the reason for my waiting to be not in vain. Look, lower oil price, higher supply of rigs, keener competition, etc. I however think that utilities is the Gem and the Urban development to be the grower.

Ironically, while the weak oil prices has been putting pressure on Sembcorp, it is the 20% fall in utilities Net profits that let Sembcorp shoot to the downside. If you ask me, it is a overshooting to the downside. For my previous analysis, read here

The 20% is largely due to one-off items such as IPO gain and impairment. Take away the one-off item, market should not react in this manner. UK operations turning in profits again mean the impairment should be over, Singapore Utility NP actually show a QoQ improvement. China, is the biggest spanner. But as I said again, all these reasons/ analysis are the nitty gritty which I could easily get wrong or right.

Reasons that allow one to sleep soundly are core reasons

I might get many reasons wrong, but if Sembcorp if to say drop another 10-15%, I think I will accumulate, the same goes for ST engineering. I think the long term moat is still intact, and these poor quarterly results provide opportunities for entry.

The fact that they pay decent dividends also provide pain killers during the long wait for recovery.

It is for this reason, that I finally decided to take yet another switch. I take profits off the table of APTT. It has been a good ride, and will most probably continue to be good. But compare to Sembcorp Industries with negligible debt, lower payout ratio, and clear longer term growth drivers, I decided that at about 10xPE, it is Ok to take the plunge. Marine will be clear over the next 2 years, just like APTT. In fact, it is OK if Marine has lesser orders if the whole sector is having lesser orders, better to have smoother cyclical than a Feast and Famine type of cyclical.

Interest rate raise? While APTT as a trust will be affected, the impact on Sembcorp or ST engineering will be much nuance.

Wah we have a lot of onboard investors for sembcorp today. Looks like the shortist make a killing today shorting SCI. Lets see when the price is consolidating with fair volume. I wanted to add today but the tiger is still out there. Ill wait in the woods having been bitten on one leg.

The PE is not over demanding but if we see the past 10 years they hvnt really gone through the roof either. So either it will materialises one day and we hv a high pe otherwise it probably stay in the safe zone for consolidation.

I just looked at the chart and Q at 4.54 for Sci. Just a cursory look at the financial only.. I like what I see, low debts, high roe, stable earrings (more or less). Shld fit into my same outlook for St eng, which is defensive. No need to think so much for this conglomerate.

I'm vested in semb corp industries too, have added more today and will definitely add more if it continues to decline.

I estimate SCI to make around 42-44 cents per share this year and 45-50 cents in FY15, so at 10 times earnings with a dividend yield of 3-4% (15-20 cents payout) its pretty attractive.

while many may continue to wait for lower prices, I'm not a good market timer. I think that at the current level the valuations are cheap with a decent margin of safety.

In the short term SCI may continue to be volatile due to its correlation with oil prices, however its long term fundamentals are definitely solid. Investors looking to join the party should be prepared to hold for the long haul.